On 6 April 2011, leases and other land agreements, existing and future, will become subject to the UK Competition Act prohibition on anti-competitive agreements.
The Office of Fair Trading (OFT) published its final Guideline on how the law should be applied on 25 March, following consultation on draft guidance.
The OFT and other regulators have powers of investigation and can fine parties to an illegal agreement up to 10% of their annual group world-wide turnover. Parties may also face claims for damages. Individuals may face disqualification as directors and/or criminal liability for the most serious infringements.
In addition, and most relevantly for commercial arrangements, an illegal restriction is void and unenforceable.
Much of the Guideline deals with how parties should assess whether their agreements comply with the competition rules.
The first stage is to define which economic market(s) may be affected by any restriction. The Guideline gives assistance on how this should be done for markets in land and in the activities carried out on that land. Much of this is based upon the OFT's experience of defining markets in retail mergers.
The second stage is to assess whether the agreement has an appreciable impact on competition. The Guideline provides a more practical steer here than the draft.
It identifies two types of agreement which are expected to have an appreciable impact: agreements between competitors to share markets; and agreements which substantially "foreclose" a competitor from a market.
The Guideline also identifies types of restrictions falling into a "grey area", the legality of which will depend upon the market affected, and some restrictions which are likely to be legal. If the agreement would have an appreciable effect on competition, the parties must assess whether the agreement is exempt from the anti-competitive rules because it satisfies permitted cumulative criteria. The Guideline gives a step-by-step guide to conducting this analysis, taking as its example a shopping centre developer granting exclusivity to an anchor tenant. In practice, this analysis will depend very much on the facts of any given agreement and its economic context.
The Guideline gives seven worked examples which it considers likely to be legal, one in a grey area and one which it considers likely to be illegal. The illegal example controversially comprises a shopping centre developer granting exclusivity to a coffee shop operator, even though the centre could support further coffee shops.
Following consultation, the Guideline now explains that the OFT is unlikely to take action if no party to an agreement has more than a 30% share of the market in which the land is used. A retailer may assume that it is below the 30% threshold if there are at least four competing retailers (including itself) in the relevant area. The exception to this safe harbour is an agreement that shares markets between competitors.
While an improvement on the draft guidance, the Guideline still reflects the limited experience which the OFT has of real estate matters. The industry may hope to see further clarity with actual OFT or court cases in the near future. Until then, the Guideline gives the best possible guidance as to how competition law may apply to real estate.